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The landscape of travel distribution has been shifting. Until the mid-1990s, distribution was a straightforward mix of brand call centers, travel agencies, and in-person bookings at the hotel front desk, airline ticket counter, or car-rental outpost.11.
In hotels, for example, the launch of the Holiday Inn booking website in June 1995 marked the beginning of a turbulent assault on owner profit margins, brand value proposition, and the viability of independence.
The launch of online booking gave companies a new way to engage with customers and also opened the door to new business models such as online travel agencies (OTAs). However, in the 2000s, most travel suppliers, aggregators, and service providers focused on managing transaction costs rather than improving the customer experience, with serious implications. In 2012, we wrote about the “trouble” with travel distribution, noting, “The game is now about delivering a superior customer experience.”22.
Robert Carey, David Kang, and Michael Zea, “The trouble with travel distribution,” February 2012.

Since then, the pace of change has accelerated due to three factors. First, the competitive bar continues to rise. Among OTAs, three leading players—Ctrip, Expedia, and Priceline—have achieved global scale and relevance. And suppliers are seeking a competitive edge through several levers, including loyalty partnerships; building on the foundation set by Delta and Starwood, today’s major travel partnerships include those between Starwood and Uber, United and Marriott, and Qantas and Airbnb, among others. Second, travel technologies—especially mobile platforms—have continued to evolve as customers alter how they browse for and purchase travel. Expedia reports that 40 to 60 percent of its leisure-travel-brand traffic is through mobile devices, and about half of bookings on some brands comes from mobile.33.
“Edited transcript: EXPE—Q3 2016 Expedia Inc earnings call,” Thomson Reuters Streetevents, October 27, 2016, files.shareholder.com.
Third, potential sources of disruption are on the horizon. For example, business travel currently accounts for 10 percent of Airbnb bookings—but that number is growing, thanks to the company’s integration into the platforms of several leading travel-management companies.44.
Dan Peltier, “Airbnb scores another win with corporate travel management integration,” Skift.com, July 12, 2016, skift.com.

The shifting conditions make it more important than ever to put the customer at the center. But despite some examples of progress, we continue to see companies solve for business requirements over customer needs. Many suppliers are falling short of their potential because they focus on transaction costs instead of lifetime value. And for many intermediaries, earnings expectations, contentious supplier relationships, and an onslaught of digital newcomers have eroded the ability to test, learn, and “fail fast” that helped them identify and solve unmet needs in the first place.

The good news? The path to success is likely more straightforward than it seems. In fact, we see examples of companies implementing some or all of the strategies we will discuss:

What’s the catch? Unless executives focus relentlessly on solving for customer needs, we will continue to see ineffective promotions, lackluster apps, and uninspired pivots and product launches. Companies that can solve real customer needs, including through partnerships with other members of the travel ecosystem, will position themselves at the vanguard of travel distribution.

Trends in the shifting distribution landscape

From travelers to technology, several significant trends are influencing how companies engage with customers.

Suppliers are emboldened to innovate product development, marketing, and distribution

Intermediaries connect suppliers with consumers, but such bookings come at a cost. Thus, suppliers are pursuing strategies to drive more direct bookings:

Providing disincentives for indirect bookings. In September 2015, Lufthansa implemented a €16 fee for bookings made through global distribution systems (GDSs). While Lufthansa and third parties differ in their assessment of the fee’s impact, the move helps enable a longer-term shift to more dynamic pricing.77.
Martin Cowen, “Lufthansa flatbats DCC questions,” Tnooz, November 16, 2016, tnooz.com.

Consolidating to achieve scale. Among US airlines, mergers over the past ten years have led to four clear leaders with combined 80 percent domestic market share (and Alaska Air recently became the fifth-leading carrier, with 6 percent share, after the acquisition of Virgin America).88.
Susan Carey and Brent Kendall, “Alaska Air-Virgin America merger gets US approval,” Wall Street Journal, December 6, 2016, wsj.com.

While the specific strategy varies by supplier, the trend is clear: suppliers throughout the travel industry are willing to go further than ever to convince customers to book directly.

Intermediaries are consolidating and expanding their footprint

Three leading OTAs—Expedia, Priceline, and Ctrip—also own (at least for now) the world’s leading metasearch players.99.
“Metasearch” refers to companies such as Kayak and Trivago that aggregate search results from several travel websites.
Each continues to assume, in its own way, an expanded role in the customer journey:

Expedia (which recorded $61 billion in 2015 gross bookings) acquired Orbitz and Travelocity in 2015. It is the clear leader in the United States, with approximately two-thirds OTA market share. It is present in many travel verticals, including metasearch (Trivago), vacation rentals (HomeAway), and corporate travel (Egencia).1010.
Angelo Rossini, “State of online travel agencies: Ctrip joins Priceline and Expedia as global giant,” Skift.com, July 7, 2016, skift.com.

Priceline ($56 billion in 2015 gross bookings) is the largest player by revenue and market value, given strength in hotels through Booking.com. The clear leader in Europe, it is also present in many travel verticals, including metasearch (Kayak.com), vacation rentals (Booking.com), and restaurant bookings (OpenTable). It owns a 9 percent stake in Ctrip.1111.
Rossini, “State of online travel agencies”; Gerrit De Vynck, “Priceline takes $941 million charge; earnings beat estimates,” Bloomberg, November 7, 2016, bloomberg.com; Dennis Schaal, “Exclusive: Ctrip CEO on global ambitions, Skyscanner buy and the Priceline relationship,” Skift.com, November 28, 2016, skift.com.

Ctrip ($27 billion in 2015 gross bookings) is the fastest-growing global OTA, with a growth rate of 58 percent in 2015 alone. It is the clear leader in Chinese domestic and outbound travel and is a mobile leader, with an estimated 70 percent of bookings via app. It is consolidating its position in Asia through stakes in Qunar, eLong, and MakeMyTrip. It also has an expanding presence in many travel verticals, including metasearch (Skyscanner) and tour operators.1212.
Rossini, “State of online travel agencies”; Dennis Schall, “Exclusive: Ctrip CEO on how it moves in to buy Skyscanner,” Skift.com, November 25, 2016, skift.com; Dennis Schaal, “China’s Ctrip makes strategic investments in 3 U.S. tour operators,” Skift.com, October 25, 2016, skift.com.

These giants, along with Google and TripAdvisor, will continue to play a major role in shaping the future of distribution.1313.
For a summary of recent moves, including Book on Google and Trips, see Dennis Schaal, “Google’s travel business is already twice the size of Expedia’s,” Skift.com, November 1, 2016, skift.com. To hear directly from Google, see Dennis Schaal, “Video: Google’s travel leader on paid links and being a booking player,” Skift.com, October 27, 2016, skift.com. For details on TripAdvisor’s Instant Booking, see Dennis Schaal, “Video: TripAdvisor CEO is committed to instant booking and long-term growth,” Skift.com, October 31, 2016, skift.com.
In many cases, the relationship between these intermediaries, and between intermediaries and suppliers, is multifaceted. As recently as 2014, analysts estimated that Expedia and Priceline accounted for up to 5 percent of Google’s total ad revenue.1414.
Rolfe Winkler and Craig Karmin, “Google checks in to the hotel business,” Wall Street Journal, April 8, 2014, wsj.com.
Marriott partners with Expedia to sell dynamic travel packages through Vacations by Marriott.1515.
Kevin May, “OTAs aren’t so bad after all—Expedia to power Marriott packages channel,” Tnooz, September 6, 2016, tnooz.com.
And Southwest Airlines’ hotel offerings are provided by Priceline’s Booking.com.1616.
Dennis Schaal, “Booking.com powers hotels for Southwest, its first U.S. airline,” Skift.com, November 2, 2016, skift.com.
The continued evolution of intermediary business models will be critical to watch.

Customer behavior is maturing and shifting to mobile

Mobile is increasingly the customer’s channel of choice: by 2019, nearly 80 percent of US travelers who book online will do so via mobile, up from 36 percent in 2014.1717.
“By 2016, most digital travel bookers will use mobile devices,” eMarketer, November 19, 2015, emarketer.com.
“Mobile first” has become a favorite catchphrase, but given the massive shift in behavior, travel companies must develop a deep understanding of why and how customers are using mobile. Consider, for example, the following trends:

Mobile search is on the rise. In 2015, mobile flight and hotel searches on Google increased 33 and 49 percent year over year, respectively.1818.
“Travel Dashboard—a look back at recent trends,” Google, thinkwithgoogle.com, accessed
November 29, 2016.

Mobile plays a critical role after arrival. For instance, 85 percent of leisure travelers choose activities after their arrival, and half of international travelers use their mobile devices to search for such activities after their arrival.1919.
“Travel trends 2016: Data reveals hot spots and new consumer insights,” Google, September 2016, thinkwithgoogle.com.

Not all mobile experiences are created equal. The average rating of OTA/metasearch apps is 19 percent higher than the average of hotel brand apps.2020.
McKinsey analysis of Apple App Store data, August 2015.

Looking forward, booking may be the function ripest for innovation, as relatively few players have created a compelling, mobile-friendly booking experience.

Proliferation of big data and advanced analytics

As our colleagues recently wrote, “The data analytics revolution now under way has the potential to transform how companies organize, operate, manage talent, and create value. That’s starting to happen in a few companies—typically ones that are reaping major rewards from their data—but it’s far from the norm.”2323.
Helen Mayhew, Tamim Saleh, and Simon Williams, “Making data analytics work for you—instead of the other way around,” McKinsey Quarterly, October 2016.
This truth certainly holds in travel, where a wide range of use cases is emerging:

Optimizing network and portfolio. Aloft, for example, is piloting a digital hotel experience, with rooms equipped with Internet of Things–enabled technologies such as intelligent climate control, and using the data generated to support product innovation.2626.
Nancy Trejos, “Aloft Hotels debut voice-activated rooms,” USA Today, August 30, 2016, usatoday.com.

Driving operational and administrative efficiency. Hotels are using platforms such as ALICE (which counts Expedia as an investor) to consolidate, track, and analyze guest requests and interactions to improve the quality and speed of operations.2727.
Sean O’Neill, “ALICE thinks hotel operations could learn from innovation in other industries,” Tnooz, August 18, 2016, tnooz.com.

Before embarking on new big data or analytics ventures, it is critical to ensure adequate data security—particularly given the numerous high-profile, highly damaging data breaches in other industries.

‘New’ and increasingly powerful business models emerging

The sharing or on-demand economy, exemplified by companies such as Airbnb and Uber, is the most significant business model to emerge and scale over the past five years. The numbers themselves are notable—including rapid growth (Piper Jaffray estimates a 10 percent compound annual growth rate for short-term and peer-to-peer accommodations from 2014 to 2025, versus 3 percent for traditional accommodations2828.
Michael J. Olson and Samuel J. Kemp, Sharing economy: An in-depth look at its evolution and trajectory across industries, Piper Jaffray, March 2015, collaborativeeconomy.com.
) and valuations (including Uber at $68 billion, Didi Chuxing at $33 billion, and Airbnb at $30 billion2929.
Scott Austin, Chris Canipe, and Sarah Slobin, “The billion dollar startup club,” Wall Street Journal, February 18, 2015, wsj.com.
). But more interesting is the degree to which innovative current players continue to innovate:

Uber’s expansion continues not only into new cities but also into new modes of transportation. In a recently published white paper, the company laid out the potential for vertical take-off and landing (VTOL) aircraft for on-demand transportation, particularly in dense urban networks.3030.Fast-forwarding to a future of on-demand urban air transportation, Uber, October 27, 2016, uber.com.

Airbnb’s recently announced expansion into Trips (peer-to-peer tours and activities ranging from a few hours to a few days) and Places (including meet-ups with other users, destination guides, local recommendations, audio guides, and eventually, restaurant reservations) represents the latest step in a journey from air mattresses in spare rooms to a “super brand of travel.”3131.
Deanna Ting, “Airbnb launches Trips, its big tours and activities gamble,” Skift.com, November 17, 2016, skift.com. We highly recommend listening to the story of Airbnb’s founding; see How I built this, “Airbnb: Joe Gebbia,” NPR podcast, October 17, 2016, npr.org. Some observers, particularly Airbnb’s newfound competitors in tours and activities, are not sold on the potential of Trips; see Tony Carne, “How to burst the bubble of Airbnb Trips in two phone calls,” Tnooz, November 21, 2016, tnooz.com.

While hospitality and ground transportation have been most heavily disrupted, other modes such as air travel also continue to see innovation from models such as Rise, Surf Air, OneGo, and Set Jet. Beyond the sharing economy, specialized models continue to emerge with a focus on capturing an outsize share of specific segments. For example, Priceline founder Jay Walker’s Upside rewards “free agent” business travelers for flexibility in flight and hotel bookings.3232.
Kirsten Korosec, “Priceline founder launches new company aimed at business travelers,” Fortune, June 21, 2016, fortune.com.

Sidebar

Five questions for travel executives amid disruption

Amid these changes, we are regularly asked a number of tough questions that “keep us up at night” because there’s no easy or right answer. Nevertheless, it is increasingly important for travel-industry leaders to consider each of these issues:

If Amazon—or Apple or Google—ran a major hotel chain (or an airline, or cruise line), what would be different?

If Google aspires to be the “connector that builds awesome travel experiences, qualifies users, and then sends them off to the right partners,” what impact will this have throughout the value chain?

What deeper, unmet customer needs (beyond a play on underutilized assets and aggressive technology adoption) are driving the growth of the sharing economy?

What is the right approach to industry partnerships, consortia, joint ventures, and collaboration within regulatory and competitive dynamics?

As an incumbent looking to adapt and digitize my business to compete, how do I know where to start?

What really matters

Executives should resist the temptation to be pulled in directions that distract from their top priorities: engaging with customers more effectively, enhancing attraction and retention, and capturing more value throughout the customer life cycle. To begin the process of thinking in terms of customer lifetime value instead of cost per booking, they must answer some fundamental questions:

How much is a customer worth? In banking and many other industries, analyzing and predicting a customer’s lifetime value at acquisition is standard operating procedure. In travel, we’ve encountered very few companies that conduct this analysis consistently or at scale, despite the available data on marketing, transactions, loyalty, satisfaction, and referrals.

What can every employee do to secure the next purchase? Customer acquisition and retention can no longer be the purview of marketing and sales groups alone. Everything from back-office accounting to human resources to maintenance must be oriented toward enhancing the lifetime value of each customer.

How do customer needs and booking scenarios influence the choice of booking channel? Companies must identify and exploit the many “micro moments” in the customer journey. This journey should be mapped starting with the inspiration for the trip and combined with factors such as the customer’s location at point of purchase, the device used, historical preferences, and past experiences to deliver the right offer through the right channel at the right time.

Sidebar

If Amazon—or Apple or Google—ran a major hotel chain, what would be different?

Across a range of industries, tech companies have been exploiting key points in the customer journey—including consideration and evaluation, booking, guest experience, and loyalty. Applying lessons from these innovators to the hotel of the future yields some thought-provoking ideas for travel companies of all stripes. Some customer-facing elements, such as side-by-side comparisons of room types, exist today, while other approaches to personalization have yet to take hold across the industry (exhibit). Hallmarks of successful tech companies, such as the use of data analytics and an agile response to changing customer preferences, would no doubt inform and reshape the entire customer experience.

Exhibit

Focusing on these three strategies—and executing each of them in a more customer-focused way—will position companies for success amid the continued turbulence.

1. Harness advanced analytics to understand the customer better

We often hear travel companies talking about the advances they’ve made in creating “integrated data views,” but many cannot articulate positive, bottom-line impact. Compare that with these examples:

OTAs are currently experimenting with facial-recognition software to personalize recommendations. In fact, they have been using similar methods to improve website conversion for years.3333.
Drake Bennett, “Expedia thinks it can help you find the dream vacation you didn’t know you wanted,” Bloomberg Businessweek, February 25, 2016, bloomberg.com.

Providers that use analytics to help companies boost revenue and customer satisfaction, such as Optiontown, Plusgrade, and Boxever, are expanding quickly.

Hotels are exploring ways to combine site-selection models with new sources of information, such as Airbnb data; apply machine learning to enhance forecasting models for yield and revenue management; and deliver personalized, real-time offers based on a guest’s past behavior, current location, and propensity to buy.

The key difference? Starting with and focusing on the customer. While our research across industries suggests there are four key building blocks to ensure a successful analytics transformation, determining which customer needs can be solved with analytics must come before thinking about the data you have and need.

strategy: a detailed definition of the vision, a specific plan and milestones to be achieved, and the selection of the most effective use cases based on customer needs

organization: a targeted governance model that includes data owners and committees, clear data-aggregation and integrity-management processes, and alignment on data-quality principles and policies

technology: strategic big data architecture and the identification of additional enablers, such as data ingestion, management platforms, and analytics and visualization tools

culture: change management during the transformation (for example, training and workshops) and an agile approach to ensure delivery

It is also important to get to impact quickly. Too often, we see companies try expensive “big bang” approaches similar to mega IT projects, rather than treating analytics as a core capability to be developed over time. Instead, companies should focus on starting small and then scaling. The progression should involve identifying several high-value problems that analytics can solve, building specific data needs for the use cases, conducting pilots, and then developing the road map to scale.

2. Adjust mobile offerings to capture, secure, and serve the customer

Mobile represents the most likely vector for disruption over the next five years, as capabilities are changing more rapidly than any other technology-driven platform for customer interaction. Today, customer behavior on mobile has distinct characteristics when compared with desktop, tablet, and offline:

No idle time. Mobile users rarely return to a previous browsing session, so a click away to another site is an exit, not a detour.3636.
Interviews with three travel industry e-commerce executives, August and September 2016.

Preoccupied user. Mobile users are often doing something else, such as standing in line, commuting, riding in an elevator, or sitting in a meeting.3737.The 2014 traveler’s road to decision, Google, June 2014, thinkwithgoogle.com, p. 27.

Zero tolerance. A mobile site or app must load quickly, respond accurately, and answer the query thoroughly—or the user will abandon it (and likely not return).3939.The 2014 traveler’s road to decision, Google, p. 37.

Too often, companies start by asking, “How do I get people to use my app?” instead of focusing on creating mobile experiences that reflect customer usage. Remember that when a customer engages with a mobile website or app, navigation to the solution must be obvious and immediate. Smart design will store the most recent search or query (for example, airfares between LGA and LAX) and, in the case of a purchase transaction, suggest the most obvious next use. Similarly, if a traveler recently booked a hotel room, the platform should ask if he or she needs directions to the hotel or other destination details.

For companies wondering which platform—mobile website or app—to invest in, the answer is both. Most travelers are not loyal customers; for example, 50 percent of American Airlines’ revenue in 2015 came from the 87 percent of its customers who flew AA only once that year.4040.
Adam Levine-Weinberg, “5 things American Airlines Group, Inc. wants you to know,” Motley Fool, October 30, 2015, fool.com.
Such travelers are unlikely to download and keep your app.

Mobile sites, which are generally less expensive to develop, promote, and maintain, should provide a quick and easy booking and fact-finding experience, especially for infrequent customers. Apps should always be functional both on- and offline but should be developed specifically with offline utility and focused on loyal travelers, who are likely to make it one of their core apps.

3. Safeguard against future disruptions

One of the most common questions we hear from clients today is, “How do I avoid being disrupted by the next Uber or Airbnb?” Most big companies are playing defense—reacting to established competitors and upstarts—instead of thinking about how they can identify and solve customer needs before somebody else does.

Many in the industry are already establishing a more proactive stance. Airlines alone offer many examples: JetBlue launched a travel start-up investment arm, JetBlue Technology Ventures, in 2016, and invested in JetSuiteX in an attempt to capture the market between large commercial carriers and on-demand charters and private jets.4141.
Leena Rao, “Why JetBlue is landing in Silicon Valley,” Fortune, March 26, 2016; Doug Gollan, “JetSuiteX to launch scheduled flights in the West; Can a private jet airline be the next Southwest?” Forbes, April 5, 2016.
EasyJet took a stake in Founders Factory, which invests in start-ups, and has created a data-science team to explore operational applications of predictive artificial intelligence.4242.
Patrick Whyte, “EasyJet hopes its plan to invest in start-ups will help it stay ahead of competition,” skift.com, November 28, 2016; Derek du Preez, “EasyJet hires its first head of data science and posts record profits,” diginomica.com, November 17, 2015.
And Emirates Group partnered with Carnegie Mellon University to create the CMU-Emirates Silicon Valley Innovation Lab in an effort to put data at the center of its operations.4343.
Tara Rae Moore, “Emirates Group debuts Silicon Valley–based innovation lab in partnership with Carnegie Mellon,” Carnegie Mellon University, November 3, 2015.

Beyond investments and partnerships, there are some approaches for executives to assess their organization’s vulnerability and identify possible solutions. These approaches cannot be theoretical and must be grounded in a simple objective: to identify unmet customer needs (largely among the existing customer base) that the company can solve before somebody else does.

Growth hacking. This tactic, based on agile principles, is commonly used by start-ups to achieve rapid scale with limited resources. Companies should review all current revenue-generation initiatives and discretionary spending to determine which ones are being measured and tracked against overarching strategic objectives (for example, increasing customer lifetime value). Where necessary, they should implement new measures (for example, a customer feedback loop) and eliminate all activities that are “too intangible” to measure. Based on this insight, they can adjust business practices to amplify the high-performing initiatives and eliminate those that do not perform well.

Skunk Works. This approach involves selecting a cross-functional team of high achievers across multiple levels and assigning them to a special task force whose objective is to disrupt from within. This team should be tasked with developing new, independent offerings that compete with or replace existing products and services, complement the current business, or divert the profitability of the prevailing business model. The Skunk Works initiative, which may need to be carved out from the core day-to-day business to ensure independence, should launch new programs, products, and services to both current and new customers.

Each of these approaches requires executives to take risks and embrace failure—both rare traits in many established companies. At the same time, only new mistakes should be accepted, with shared learning celebrated at an institutional level.

The only constant in travel distribution is that innovators will thrive by identifying and addressing latent customer needs more effectively than traditional players. Most innovators don’t do it alone; as we discussed four years ago,4444.
Carey, Kang, and Zea, “The trouble with travel distribution.”
companies must unlock the power of partnerships to make progress in each of the three areas of customer centricity. The question now, with billions of dollars at stake, is whether change will again require a wave of new companies and models—or whether current companies can rise to the challenge of putting the customer at the center.